Rehabilitation Programme – Payment Mechanism Straw Man
REHABILITATION PROGRAMME
MARKET ENGAGEMENT, MAY 2013
Payment Mechanism – Straw Man
INTRODUCTION
This document sets out our “Straw Man” payment mechanism proposal for how we
will pay for the parts of the Rehabilitation Programme that will be put to market. We
would like to have comments from potential providers on our proposal and aim to use
these to refine the payment mechanism before it is finalised in the contracts.
Potential providers can submit the feedback they have on the proposal using the
online questionnaire at http://www.justice.gov.uk/transforming-rehabilitation/priorinformation-notice where we have included some key questions for potential
providers to respond to. These can also be viewed in Annex 2 to this document. To
allow us time to consider responses, the deadline for submitting feedback is 5th July.
Please note that further iterations of the payment mechanism including a draft
contractual schedule may be published later in the market engagement process for
further feedback and comment.
PAYMENT MECHANISM SUMMARY – KEY DESIGN FEATURES
Fee For Service
Annual price paid in twelve equal payments made monthly in arrears
Subject to an annual learning curve discount to drive continuous improvement
Providers will bid against a predicted baseline volume range, weighted for
sentence type & length
At the end of each contract year, the payment is reconciled to the actual volumes
recorded, with a retrospective payment or clawback applied if actual volume is shown
to have been outside the predicted range
Deductions made for failure to deliver the orders of the court to specified time and
quality
Payment by Results
Binary & Frequency measure with a binary “hurdle”
Quarterly cohorts (to reduce the time lag) with annual top-up payment for genuine
improvement against annualised targets
Monthly ‘Foundation Payment’ of part of the providers profit component paid
upfront for expected achievement of quarterly PbR targets
Payment only for achieving demonstrable results, with clawback available for
underperforming and higher payments for further improvements over minimum
requirement
Large financial deductions / termination for increase in re-offending rates
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Rehabilitation Programme – Payment Mechanism Straw Man
FEE FOR SERVICE
The Fee For Service (FFS) is payment for mandated activities that deliver through
the gate services, the sentence of the court and licence conditions to time and
quality.
We recognise that volume risk - i.e. the risk that providers are required to deliver
services for a larger or smaller number of offenders than expected – is a serious
concern, and therefore the risk needs to be shared between Government and
providers.
Whilst the MoJ is best place to manage factors that could make significant changes
to volumes, we also need to ensure that providers are still incentivised to focus firmly
on reducing reoffending.
The FFS component will therefore be a fixed price for services with a volume related
adjustment where changes to volume levels fall outside of an appropriately
determined tolerance range. This volume tolerance range recognises that the likely
reason for a significant increase or decrease in volume is most likely to be due to
external factors not within the control of a provider
The graph below shows the key components of the FFS mechanism.
Annual
Payment
Fee For Service Payment
Mechanism
Maximum
Volume Adjusted
FFS
Baseline FFS
Marginal Cost
of Change in
Volume
Annual WAV
Tolerance
Estimated Fixed
Cost (as % of
total FFS)
WAV Baseline
2
Weighted Annual
Volume (WAV)
FFS Volume Cap
Measure
(Re-negotiation
Trigger)
Rehabilitation Programme – Payment Mechanism Straw Man
The details of the FFS mechanism are described below:
Annual Payment
The Annual Payment is a fixed fee for the delivery of all services against the
predicted volume range for the coming year.
Twelve equal payments will be made monthly in arrears. At the end of each contract
year, the Annual Payment is reconciled to actual volumes over the year. A
retrospective payment or clawback will be applied if, at the end of the contract year,
actual volume is shown to have been outside the predicted range.
At the end of each contract year, the fixed price point for the coming year will be
determined based on the predicted volume range. This will be agreed with the
provider prior to the contract year commencement.
Weighted Annual Volume (WAV) Measure
Volumes will be measured using a single measurement unit. This single
measurement of volume is based on the number of offender starts and comprises
differently weighted service requirements. Payment will then be pro-rated over twelve
months.
The varying service requirements will be weighted according to the level of resource
typically required to deliver them. Therefore an increase in the number or length of a
highly weighted start type within the volume mix would mean a greater increase in
the overall volume measurement than if there was a corresponding increase in the
number or length of a lesser weighted start type.
The WAV measure captures the net changes in overall resource requirements for
different sentence volumes and types and will be as high level as possible so that
this does not unduly influence the way in which providers deliver the sentence.
Certain sentence requirements will require more resource than others, irrespective of
the way they are delivered, depending on type of sentence and its length (e.g. 100hrs
vs 200hrs of CP or rehabilitation order vs accredited programme) Factoring in the
resource related to the sentence and requirement type means that “sentencing trend
risk” as well as overall “volume risk” is appropriately shared, as indicated in the
example calculation table below:
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Rehabilitation Programme – Payment Mechanism Straw Man
Sentence Type
Sentence
Annual Volume of Weighted Annual
Weighting
Offenders
Volume (WAV)
1
100
100
2
100
200
3
100
300
TOTALS:
300
600
Baseline
Scenario
Sentence X
Sentence Y
Sentence Z
Volume
Scenario
1
Sentence X
Sentence Y
Sentence Z
50
125
100
275
- 25
50
250
300
600
0
Volume
Scenario
2
Sentence X
Sentence Y
Sentence Z
10
10
200
220
- 80
10
20
600
630
+ 30
Volume
Scenario
3
Sentence X
Sentence Y
Sentence Z
200
150
10
360
+ 60
200
300
30
530
- 70
1
2
3
TOTALS:
Variance from Baseline:
1
2
3
TOTALS:
Variance from Baseline:
1
2
3
TOTALS:
Variance from Baseline:
The detail of the WAV measure is currently being developed, however the indicative
categories of sentence requirements whose weighting may have direct influence on
the WAV calculation include:
o
o
o
o
o
Manage the sentence for a Community Order or Suspended Sentence Order
Deliver a Supervision Requirement
Deliver an Unpaid Work Requirement
Deliver Accredited Programme (eg Women Offenders Programme)
Deliver Other Intervention (eg supporting Mental Health treatment)
WAV Baseline
For the purposes of tendering we will use historical data to project the year 1 WAV
Tolerance range for each CPA. This will be used as the baseline tolerance range for
the purposes of tendering.
Baseline FFS
The fixed Annual Payment that the provider proposes is necessary to achieve
delivery of services at volume levels within the WAV Baseline tolerance range. This
is the one variable of the payment mechanism that providers will bid against.
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Rehabilitation Programme – Payment Mechanism Straw Man
Annual WAV Tolerance
Represents defined ranges of the WAV unit measurement, within which a fixed price
will not be adjusted for changes in volume. Having a volume tolerance range within
which the FFS will not change reduces any perverse incentive for the provider not to
act in a way to reduce reoffending rates.
The size of the WAV Tolerance ranges represent the level of volume risk passed to
the provider. The wider the bands, the greater the risk passed to the provider. We
will set WAV Tolerance ranges that are consistent and symmetrical either side of the
relevant baseline, to reflect that significant changes in volume will likely be due to
structural system changes outside of the control of the provider. Providers take
volume risk within the WAV Tolerance ranges; MoJ takes volume risk between the
ranges.
The tolerance around the annual Baseline WAV for each CPA will be set using
historical variability in volumes, and will therefore vary between CPA.
Price Adjustments for Changes in Volume
Where volumes move from one WAV Tolerance range to another there will be an
adjustment to the fixed price Annual Payment. A fixed % change (increase or
decrease) is applied for each Annual WAV Tolerance range beyond the baseline.
The adjustments recognise that large volume changes will likely be due to structural
changes. The size of the adjustment will be based on estimated marginal cost of
service delivery. To enable comparison of bids, this % adjustment will be fixed and
consistent for all bidders.
Maximum Price Band
These volume adjustments to the fixed annual price will be applicable for up to a
100% increase in volume relative to the WAV Baseline. For increases in volume
beyond 100% contract renegotiation will be triggered.
Minimum Price Band
Volume adjustments to the fixed annual price will also be applicable for up to a 50%
decrease in volumes relative to the WAV Baseline. For decreases in volume beyond
50% contract renegotiation will be triggered.
Indexation
The indices used for indexation of the FFS payment shall be prescribed by the MoJ.
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Rehabilitation Programme – Payment Mechanism Straw Man
Performance Management
A performance mechanism will allow MoJ to manage contracts robustly and make
deductions where the orders of the court are not delivered in accordance with the
quality standards set out in the contract.
Key Performance Indicators (KPIs) will be used to periodically measure the quality of
service delivery, ie whether the orders of the court have been delivered as required.
Failure to attain pre-determined KPI targets will permit MoJ to deduct a proportion of
the subsequent FFS payment. These KPIs will also be linked to non-financial
performance mechanisms, such as issuance of Improvement Notices and ultimately
contract termination.
Learning Curve Discount
An annual Learning Curve Discount will be applied to help drive continuous
improvement. The discount will be set by the MoJ as a % reduction in the FFS for
each year of the contract. To achieve the same level of profitability year on year
providers will be required to either:
o improve their efficiency whilst achieving the same level of reoffending
outcomes; or
o improve their reoffending outcomes to achieve a greater % profit and offset the
FFS reduction.
This is illustrated in the diagram below:
Payment
(£)
Key:
Maximum PbR Payment
(Payment “at risk”)
Fee For Service Payment
Contract Year
1
2
3
4
5
6
7
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Rehabilitation Programme – Payment Mechanism Straw Man
PAYMENT BY RESULTS (PbR)
The PbR element of the payment mechanism is designed to incentivise bidders to
continuously innovate and improve performance throughout the life of the contract
and, reduce re-offending rates significantly beyond historic levels. This model is
designed to pay the provider the profit component of their total cost model only where
they achieve significant improvements in reoffending rates.
The PbR mechanism is described below.
Offender Cohorts
The PbR measurement will be based on a series of offender “cohorts”. These are
the groups of offenders whose re-offending will determine the providers success or
otherwise at reducing re-offending rates. Cohorts will be built up on a quarterly basis
and will include:
o all offenders released from a custodial sentence;
o all offenders who begin a community order (CO);
o all offenders who begin a suspended sentence order (SSO).
The cohorts will exclude:
o offenders who do not receive one of the above disposals
o offenders initially assessed by the public sector as high risk of harm;
MAPPA and public interest cases;
o foreign national offenders subject to deportation.
A single cohort will be constructed on a 3 month basis in each CPA. It will not be
segmented by the type of sentence although statistics for each type of sentence will
be collected for monitoring purposes.
Cohorts will exclude offenders deemed as “high risk of harm” in the initial risk
assessment, current MAPPA offenders and a small number of public interest cases
as these will be managed by the public sector probation service.
In instances where an offender’s risk profile escalates to a point that they need to be
transferred to the public sector probation service, the offender will remain within the
cohort for PbR measurement and payment purposes.
Such instances will be monitored and measured through the performance
mechanism with appropriate KPIs attached to incentivise appropriate behaviour in
managing risk.
PbR Metrics
A proven re-offence will be counted as any offence committed within a one year
follow-up period, following an offender’s entry into the cohort, which then attracts a
court conviction or caution within that one year follow-up period or within a further six
month waiting period to allow for cases to work their way through the courts.
To maintain consistency and maximise transparency offences will be counted using
the National Statistics ‘proven re-offending’ measure and therefore counted as
proven re-offences if they meet all of the following criteria:
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Rehabilitation Programme – Payment Mechanism Straw Man
1. They were committed in England or Wales.
2. They were prosecuted by the police
3. They are recordable on the Police National Computer (PNC)
4. They are proven through a caution or court conviction. Offences that are
not proven, or which meet with other responses from the Criminal Justice
System, are not counted.
5. The offence is not a breach offence, i.e. breach of a court order.
We are committed to only rewarding in full for complete desistance from crime;
however the payment mechanism will also take into account each further offence so
that providers cannot neglect the most difficult offenders and those who have already
reoffended, and so that every victim of crime is taken into account in providers’
reward payments.
Therefore there will be two measures for re-offending used to calculate the PbR
payment. These include:
1. Binary metric = measures the percentage of offenders that are convicted
of an offence within a 12 month period.
2. Frequency metric = measures the rate of offences committed by offenders
within a cohort within a 12 month period.
PbR payments will be allocated on the basis of performance against the binary
measure and the frequency measure, with a percentage of the total funding available
linked to each.
However, to receive any PbR payment, a provider will have to have improved
performance on the binary metric to a point of statistical significance within the given
CPA, regardless of performance against the frequency metric. This reflects the
importance placed on achieving complete desistance from re-offending.
Reducing Re-offending Baseline
A baseline for both binary and frequency of reoffending will be set for each CPA
based on average quarterly reoffending figures for the most recent year that data is
available.
This baseline will be adjusted once the make-up of the cohort is known (at the end of
the 3 month cohort build up period) to account for changes in the offender mix.
OGRS Scores for the cohort will be used to make this adjustment.
Reducing Reoffending Targets
Statistically significant points (SSPs) will be set that identify the appropriate minimum
changes to the re-offending rate that would need to take place before any PbR
adjustments are applied to the payment received by the provider.
The higher SSP will represent the minimum improvement in re-offending rates
expected by the MoJ (Target Level Baseline), whilst the lower SSP will represent the
level of re-offending rates significantly worse than the baseline and therefore
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Rehabilitation Programme – Payment Mechanism Straw Man
considered unacceptable (Penalty Level Baseline). This will result in financial
deductions to the provider.
PbR payments will only be made through the achievement of a demonstrably
significant improvement in re-offending over the agreed CPA PbR Baseline.
These targets are intended to discourage providers from allowing any increase in the
re-offending rate through disinvestment in services as this would lead to financial
deductions and ultimately contract termination. Contract termination could result
from any single large increase in reoffending rate (Termination Trigger) or from
allowing any repeated failure to achieve at least the rates within the significant
baseline range.
Payment Curve
The payment curve has been designed to incentivise the provider by applying stretch
targets beyond a SSP, as indicated in the example below:
Payment
(£)
This PbR payment is designed to pay the
provider the profit component of their total cost
model
Cost and Payment Breakdown
Payment
(£)
The payment curve has been designed to
incentivise the provider by applying stretch
targets beyond a significant point
Payout Curve
A
Super Profit
PbR bonus
payment
Normal Profit
PbR Foundation
Payment
Operating Costs
Fee for Service
B
C
D
E
Statistically
Significant
Baseline
Range
F
Cost
Breakdown
Termination
Trigger
(50%)
Payment
Breakdown
Baseline
(45%)
Penalty
Level
Baseline
(48%)
Target
Level
Baseline
(42%)
Payment
Cap
(35%)
This diagram demonstrates the relationship between indicative levels of performance
and the associated levels of payment and expected return to providers. These
various payment scenarios are further described in the following table. All %s are
purely for illustrative purposes and will be bid as part of the competition process:
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Indicative
Reoffending
Rate
Rehabilitation Programme – Payment Mechanism Straw Man
Payment
Curve
Scenario
A
Description
The re-offending rate is
improved substantially
beyond the upper
(positive) SSP
Indicative
Impact on
profitability
Additional
Profitability
above a purely
FFS model
B
The re-offending rate is
improved beyond the
upper (positive) SSP
“Normal” profit
levels achieved
C
The re-offending rate is
at the upper SSP
D
The re-offending rate is
within the statistically
significant baseline range
Some profit
achieved but
not full “normal”
profits
0% Profit
E
The re-offending rate is
at or below the lower
(negative) SSP
F
The re-offending rate is
substantially below the
lower (negative) SSP
c.10% Penalty
Contract
Termination
Contract
Termination
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Rationale
A maximum payout is only
achieved for a very large
reduction in re-offending rates.
This incentivises providers to
continue to innovate to make
improvements in reoffending
beyond the minimum target.
This bonus payment is capped
at an absolute, affordable
figure. The re-offending rate
needed to achieve this will
depend on the number of
offenders in the cohort
A total normal profit is paid in
addition to the FFS. Only at
this point is the provider
receiving the ‘full’ payment
equivalent to payment under a
non-PbR model. Again this
incentivises the provider to
continue to improve
reoffending rates beyond the
minimum target level.
For a demonstrable
improvement in reoffending
rates, some normal profit is
paid in addition to the FFS.
For no demonstrable
improvement in reoffending
rates, no profit is achieved,
only the FFS is paid
Initially a significant % of the
FFS is recovered as a financial
penalty. For repeated
instances, contract termination
is triggered.
This is designed to be of a
sufficient level that incentivises
providers not to disinvest in
services without giving them
an uncapped financial risk
over the life of the contract.
Unacceptable performance will
result in contract termination.
Rehabilitation Programme – Payment Mechanism Straw Man
Timing of PbR Payments / Cash Flow
The time lag to measure PbR outcomes is substantial (25 months including 3 months
to form cohort + 12 months re-offending window + 6 months court waiting time + 4
months for data analysis) and therefore the PbR Foundation Payment is designed to
ease the provider’s cash flow. The Foundation Payment is set at a level that is the
expected payment for achieving the quarterly PbR targets. This is part, but not all, of
the provider’s “normal profit”.
This will be estimated and paid on a monthly basis, together with the FFS. At the
point at which PbR results are finalised, this payment will be clawed back if the
quarterly targets have not been achieved (see Annex I).
PbR Volume Risk
To ensure that the MoJ retains volume risk related to PbR, payments will be adjusted
to take account of volumes as follows:
Binary payout (offenders complete desistance over 12 month period) =
(reduction in re-offending rate) x (£ per offender amount) x (Number of offenders in
the cohort)
Frequency payout (offenders reconviction events over 12 month period) =
(reduction in re-offending rate) x (£ per % point change in re-offending rate) x
(number of offenders in the cohort / number of offenders in the baseline cohort)
For affordability reasons, the total PbR payment available will not be adjusted for
changes in volumes. However, where volumes increase, providers will achieve the
maximum cap on payments at a lower percentage change in reoffending rates.
Annual Reconciliation
The payment mechanism will seek to balance the need to give providers certainty
early with the desire to pay for genuine improvements in reoffending rates. To bring
forward timing of PbR payments we have set the mechanism to pay out based on
targets for 3 month cohorts. Targets for 3 month cohorts are potentially higher than
they would be for annual cohorts where the cohort is small and there is greater
variability in the level of reoffending for the 3 month cohort relative to the larger
annual cohort.
Where a provider does not meet the comparatively high quarterly cohort targets but
has still made a statistically significant impact on reoffending rates over the year (i.e.
would have met the lower annual cohort target), it is appropriate that the provider is
paid for this as they have achieved a result.
Therefore we will “top up” the quarterly PbR payments made to a provider with an
annual PbR payment, on the same basis, based on the provider’s annual reoffending rate.
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Rehabilitation Programme – Payment Mechanism Straw Man
For example:Quarterly SSP Target – 5% points
Annual SSP Target – 3% points
Quarterly cohort size – 1000
PbR Payment Per offender - £100
Results:-
Quarter 1
Reduction in
Reoffending
Achieved
3% points
Quarter 2
3% points
Quarter 3
5% points
Quarter 4
5% points
Annual Top Up
Payment
4% points
Quarterly PbR
Payment Due
“Top-up” through
Annual Payment
£0
(Target not
achieved)
£0
(Target not
achieved)
5000
=1000*£100*5%
5000
=1000*£100*5%
6000
=(4000*100*4%) –
5000 – 5000
16000
=5000 +5000 +
6000
Net Payment Due
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Rehabilitation Programme – Payment Mechanism Straw Man
Annex I
Payment by Results – PbR Foundation Payment / Cash flow
1st Monthly FFS & PbR Foundation
Payment
Last Monthly FFS & PbR Foundation
Payment
PbR Bonus Payment / Foundation Payment
Clawback
25 Months
1st offender
discharged in
Qtr 1 cohort
Last offender
discharged in
Qtr 1
cohort
End of 1st
offender
reoffending period
End of last
offender
reoffending
period
Cohort period
PNC and
data
analysis
lag
Offence to
conviction lag
Reoffending period
6 Months
Each offender discharged has a 12 month reoffending
Month 0
Month 3
Month 12
13
4 Months
Month 15
Month 21
Month 25
Rehabilitation Programme – Payment Mechanism Straw Man
Annex 2
Feedback Questionnaire
1.
Are there any elements of the proposed payment mechanism that are not clear?
Where would you like additional clarity?
2.
Do you think the proposed structure of the Fee for Service (FFS) element of the
payment mechanism is appropriate for the services being contracted? If not,
what are your concerns? How would you suggest the mechanism be improved?
3.
Do you think the proposed structure of the Payment by Results element of the
payment mechanism is likely to incentivise providers to focus on reducing
reoffending? If not, what are your concerns? How would you suggest the
mechanism be improved?
4.
The model proposes that contractors put a substantial part of their total fee (cost
plus margin) at risk for reductions in reoffending. What minimum level of "at
risk" payment would you consider to be sufficiently incentivising? What
maximum level of total fee "at risk" would be acceptable?
5.
Are there any elements of the proposed payment mechanism that would
incentive the "wrong" behaviours? If so, what are these and what behaviours
could they drive?
6.
Do you have any other comments regarding the proposed payment mechanism?
Please note the deadline for submitting feedback is 5th July 2013.
Future iterations of the payment mechanism including a draft contractual
schedule may be published later in the market engagement process for further
feedback and comment.
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